November 12, 2009

Corporates may be able to set up universities through section 25 companies

“We have received requests demanding this route. The government is
exploring the possibility, as it could be allowed under Section 25 of the
Companies Act,” confirmed Sunil Kumar, joint secretary, Ministry of Human
Resource Development (MHRD), ......

At present, educational
institutions in India can be set up only by trusts, societies or companies, and
it is not possible for non-profit companies, like industry associations, under
Section 25 of the Companies Act, to set up institutions and get recognition from
the University Grants Commission. In the primary and secondary education space,
however, the Central Board of Secondary Education (CBSE) allowed companies
registered under the Act to start private unaided schools last year.

Some higher education institutions have taken this route in the
technical education space to escape policing by the All India Council for
Technical Education (AICTE) — the body that regulates technical education in the
country. For instance, many management schools have gone the Indian School of
Business (ISB) way, opting for a one-year management programme (against the
conventional two-year courses), and have registered themselves under Section 25
of the Act. ....

Educational institutions in India, which are set up
by trusts or societies come under the purview of the Charity Commissioner, who
is appointed by a state government. Section 25 of the Act, on the other hand,
comes under the Central Board of Direct Taxes (CBDT), thus reinforcing the
control of the Centre and not the state over the manner in which the
institutions are run and financed.

However, in both the structures —
non-profit or society and trust — profits cannot be taken out of the institution
and have to be reinvested. Institutions registered under the Act have to use
their profits, if any, in promoting the institutions. The Act also prohibits the
payment of any dividend to its members. The association may enjoy all the
privileges of charitable trusts, but are scrutinised by the Income-Tax
Department and not Charity Commissioner, unlike limited companies.

MHRD
says it is still studying the way out for students if an institution set up
under the Act winds up and its assets are to be transferred to another similar
institution. “As of today, if an institution set up by a society winds up, its
operation and properties are transferred to another institution. But in this
case, we are still studying what route a non-profit entity could acquire if it
faces a similar issue,” added an HRD official.

Experts add, this
arrangement will allow standards for centrally-administered institutes to be
cleared by one central authority rather than different standards for different
states

This was actually mooted
a little over an year ago. But why all this hoopla? What is the difference
between being a trust, a society or a section 25 company? What is the difficulty with a section 25 company setting up a university? A study on charities in India throws some light with a comparison of a section-25 company, a society and a trust across various parameters.

There is one uniform law across the country for companies, the Companies Act, 1956. It is this robust law protected by powerful commercial interests that makes it very difficult for the state government to take over a section 25 Company. The company form is recognised all over the world, it is more closely regulated and monitored than trusts and societies.

But the confusion still remains. Why should the state want to take over or dissolve a section-25 company running a university? In the event of the incumbent management of a section-25 company running a university mismanaging the university, shouldn't the state be facilitating a takeover of the mismanaged section-25 company by any other interested party capable of running the university well? When the fraud at Satyam Computers came to light, the state didn't take over the company. It only appointed an independent board of directors comprising of experienced and respected professionals who set the house in order and found another entity willing to acquire the assets and liabilities of Satyam and run it going forward.

Comments

“We have received requests demanding this route. The government is
exploring the possibility, as it could be allowed under Section 25 of the
Companies Act,” confirmed Sunil Kumar, joint secretary, Ministry of Human
Resource Development (MHRD), ......

At present, educational
institutions in India can be set up only by trusts, societies or companies, and
it is not possible for non-profit companies, like industry associations, under
Section 25 of the Companies Act, to set up institutions and get recognition from
the University Grants Commission. In the primary and secondary education space,
however, the Central Board of Secondary Education (CBSE) allowed companies
registered under the Act to start private unaided schools last year.

Some higher education institutions have taken this route in the
technical education space to escape policing by the All India Council for
Technical Education (AICTE) — the body that regulates technical education in the
country. For instance, many management schools have gone the Indian School of
Business (ISB) way, opting for a one-year management programme (against the
conventional two-year courses), and have registered themselves under Section 25
of the Act. ....

Educational institutions in India, which are set up
by trusts or societies come under the purview of the Charity Commissioner, who
is appointed by a state government. Section 25 of the Act, on the other hand,
comes under the Central Board of Direct Taxes (CBDT), thus reinforcing the
control of the Centre and not the state over the manner in which the
institutions are run and financed.

However, in both the structures —
non-profit or society and trust — profits cannot be taken out of the institution
and have to be reinvested. Institutions registered under the Act have to use
their profits, if any, in promoting the institutions. The Act also prohibits the
payment of any dividend to its members. The association may enjoy all the
privileges of charitable trusts, but are scrutinised by the Income-Tax
Department and not Charity Commissioner, unlike limited companies.

MHRD
says it is still studying the way out for students if an institution set up
under the Act winds up and its assets are to be transferred to another similar
institution. “As of today, if an institution set up by a society winds up, its
operation and properties are transferred to another institution. But in this
case, we are still studying what route a non-profit entity could acquire if it
faces a similar issue,” added an HRD official.

Experts add, this
arrangement will allow standards for centrally-administered institutes to be
cleared by one central authority rather than different standards for different
states

This was actually mooted
a little over an year ago. But why all this hoopla? What is the difference
between being a trust, a society or a section 25 company? What is the difficulty with a section 25 company setting up a university? A study on charities in India throws some light with a comparison of a section-25 company, a society and a trust across various parameters.

There is one uniform law across the country for companies, the Companies Act, 1956. It is this robust law protected by powerful commercial interests that makes it very difficult for the state government to take over a section 25 Company. The company form is recognised all over the world, it is more closely regulated and monitored than trusts and societies.

But the confusion still remains. Why should the state want to take over or dissolve a section-25 company running a university? In the event of the incumbent management of a section-25 company running a university mismanaging the university, shouldn't the state be facilitating a takeover of the mismanaged section-25 company by any other interested party capable of running the university well? When the fraud at Satyam Computers came to light, the state didn't take over the company. It only appointed an independent board of directors comprising of experienced and respected professionals who set the house in order and found another entity willing to acquire the assets and liabilities of Satyam and run it going forward.